In a significant win for California employers, the U.S. Supreme Court ruled last week that employees can be bound by agreements to arbitrate their individual wage claims brought under the state's Private Attorneys General Act (PAGA). Although this much-anticipated ruling is cause for celebration by California's employers, the celebration may be short-lived if the California legislature amends PAGA to address the standing issues highlighted by the Court.

Approved by the California legislature in 2004, PAGA allows private citizens to file lawsuits on behalf of the state as a means to enforce California labor laws. PAGA was the first, and remains the only, such legislation of its kind in the country.

Although the Court's ruling in Viking River Cruises, Inc. v. Moriana left untouched California's existing ban on wholesale waivers of PAGA claims, it found that PAGA claims can be divided into arbitrable "individual" claims and nonarbitrable "representative" claims. The Court also recognized that under PAGA's current regulations, when an employee's individual PAGA claims are sent to arbitration, the employee loses standing in court to pursue nonindividual PAGA claims on behalf of other employees and such nonindividual claims must be dismissed. The Court's ruling in this case is consistent with earlier rulings and a clear trend by the courts to enforce arbitration in lieu of costly and time-consuming lawsuits.

Background

The decision arose out of a lawsuit filed against Viking River Cruises (Viking) in California state court. The plaintiff, Angie Moriana, had worked as a sales representative and had signed an arbitration agreement. The agreement contained a "Class Action Waiver" that provided that the parties could not bring any dispute as a class, collective, or representative action under PAGA. The agreement also contained a severability clause that specified that, if the waiver was found invalid, any PAGA action would be litigated in court, but, if any portion of the waiver remained valid, it would be enforced in arbitration.

After Viking terminated Ms. Moriana's employment, she filed a PAGA representative action asserting final wage payment claims on her own behalf and an array of wage and hour violations on behalf of other Viking employees. Viking moved to compel arbitration of Ms. Moriana's individual PAGA claims and dismiss her representative PAGA claims. Applying California Supreme Court precedent in Iskanian v. CLS Transportation Los Angeles, LLC, the California courts denied the motion on the grounds that wholesale waivers of PAGA claims are contrary to California public policy and PAGA claims cannot be split into arbitrable "individual" claims and nonarbitrable "representative" claims.

The U.S. Supreme Court reversed in an 8-1 decision, with Justice Clarence Thomas dissenting. The Court found that the Federal Arbitration Act (FAA) preempts the rule of Iskanian insofar as Iskanian precludes division of PAGA actions into individual and nonindividual claims through an agreement to arbitrate and that PAGA's built-in mechanism of claim joinder is also in conflict with the FAA. Although the Court specifically stated that the FAA does not preempt Iskanian's invalidation of wholesale waivers of PAGA claims, it found that the severability clause in Ms. Moriana's agreement provided that, even if the waiver was invalid in some respect, any portion of the waiver that remained valid would be properly enforced in arbitration. Accordingly, the Court found that Viking was entitled to compel arbitration of Ms. Moriana's individual PAGA claim.

The Court also addressed the remaining question: how lower courts should have handled Ms. Moriana's nonindividual claims. It concluded that they should have been dismissed. Under PAGA's current standing requirement, an employee can maintain nonindividual PAGA claims only in an action in which the employee also maintains individual claims. Thus, when an employee's individual claims are pared away and sent to arbitration, the employee no longer has statutory standing under PAGA to maintain the nonindividual claims. As a result, the Court found Ms. Moriana "lacks statutory standing to continue to maintain her nonindividual claims in court, and the correct course is to dismiss her remaining claims."

Impact on California Employers

Although California employers should rightfully celebrate this win, it is important to recognize that the victory may not last long given the likelihood that California's legislature will enact the necessary revisions to PAGA. In the Viking River Cruises decision, the Court specifically pointed out that PAGA currently "provides no mechanism to enable a court to adjudicate nonindividual PAGA claims once an individual claim has been committed to a separate proceeding." This language leaves open the possibility that California could enact changes to PAGA that could potentially circumvent these issues and allow the nonindividual claims to proceed separately from the individual claims. As always, DWT will continue to monitor this issue and provide updates on all developments as they arise.

In the meantime, California employers are wise to consider implementing or updating their arbitration agreements, as the case may be. Employers should proceed cautiously, however, as the fate of AB 51 (California's law prohibiting mandatory arbitration agreements as a condition of employment) is currently before the Ninth Circuit. For now, all new employment arbitration agreements must be voluntary to be enforceable.

Employers with PAGA actions currently pending in court should also consider whether to move to compel arbitration; while arbitration has significant advantages, there are costs and risks involved, so an informed decision should be made.

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